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9 Rules to Consider Before Signing an Arbitration Provision
By Theodore Sutton
Binding arbitration is becoming a popular method to resolve disputes in real estate transactions. Arbitration provides certain advantages that courts do not. For instance, arbitrations are private, they resolve disputes in a more timely and efficient manner, and they obviously provide a much cheaper alternative to a full-on court trial. While arbitrations provide all these benefits, parties entering a contract must pay special attention to the language written in arbitration clauses. Many undesirable consequences can arise if the language in these clauses is vague and unsatisfactory, such as having unenforceable provisions or prohibiting the use of discovery. While laws differ from state to state (and be sure to consult your own attorney) below are some general issues to be considered before an arbitration provision is signed:
1. Transaction Documentation – The arbitration provisions are required to be included as an alternate dispute resolution matter within the transaction documentation. These provisions should be more general in order to encompass different types of disputes, such as tort and contract disputes. Stand-alone arbitration agreements are more definitive, and may be useful to also be included within the documents related to your specific transaction.
2. Arbitration Commencement – A provision acknowledging that both parties are voluntarily agreeing to an arbitration must be included in the contract. It is also imperative that this provision states that:
- The parties are knowingly and voluntarily waiving their right to a jury or court trial.
- Any uncooperative party be compelled to arbitrate through a court order.
- The arbitration is binding and may not be appealed. (Know that some states don’t provide for exceptions).
3. Arbitrator Selection – These selection provisions must be clearly established so both parties will have a say in selecting the arbitrator, the person deciding your case. This is important because it allows both parties to select either an experienced retired judge or appellate justice, a private attorney or a licensed arbitrator.
4. Rules of Evidence – In some states, arbitrators are allowed to be “arbitrary.” The easiest way to avoid this is to include an arbitration provision that requires the arbitrator to follow to the rules of evidence in legal proceedings.
5. Discovery – Discovery rights (the right to discover the other side’s evidence) must be specified. Otherwise the arbitrator is not required to permit discovery. Specific dates and times must be provided in order for the discovery to be conducted.
6. Court Reporter – Court reporter costs are frequently ignored. One way to prevent this is to share the cost in the contract to avoid disputed fees.
7. Initials – Arbitration provisions must be initialed by both parties within the contract in order for them to be enforceable.
8. Exceptions – Exceptions from arbitration may be included in arbitration provisions. Some common exceptions are foreclosure proceedings, unlawful detainer actions, and injunctive reliefs.
9. Judgment Entry – In some states, it is required to authorize the arbitrator to enter their award as a court judgment. Arbitration can save your time and money. But as with any legal matter, you want to do it right. This starts with a good contract. Be sure to consult your attorney on arbitration issues. As mentioned, the rules vary from state to state.
Theodore Sutton is a graduate of the University of Utah and will attend the University of Wyoming Law School in the Fall of 2019.